Mike Khouw's QQQ Hedge

On CNBC's "Options Action," Mike Khouw spoke about a possible downturn for the tech sector and he suggested a way to hedge your tech portfolio.

He gave an example of an investor with a portfolio of $100,000, invested in stocks like Apple Inc. AAPL, Amazon.com, Inc. AMZN, Facebook, Inc. FB, Tesla TSLA and Alphabet Inc GOOGL GOOG.

To set up the hedge, Khouw wants to use PowerShares QQQ Trust, Series 1 QQQ. To figure out how many put options he needs to buy, he needs to divide $100,000 with the price of QQQ, which is at $255.56. The result is the number of shares you need to sell and in this case, it's around 400 shares. Since Khouw wants to use options, he needs to buy four puts. Specifically, he would buy four contracts of the September $240 puts for $6.50 each.

The total cost for the hedge would be $2,600 or 2.6% of his portfolio. With the trade, Khouw will have a protection below $233.50.

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